I've written before about the statistical collation of the Australian employment numbers and the relative disconnect from the anecdotal news we're seeing here. It's hard to believe that economists once again failed to come close to the real figures when they predicted a loss of 10,000 jobs and were greeted today with the news that the total number or people with jobs rose 1,100 to 11.663 million in the month, meaning the unemployment rate fell 0.1 per cent to 5.5 per cent in May. The April figure was upwardly revised to 5.6 per cent from 5.5 per cent. I'm not sure how to take these numbers given most other numbers we're seeing suggest a distinct weakening with many forecasting for a significant jump in unemployment in the next 12 months. Also it's not as though the participation rate has changed much, which leaves me scratching my head somewhat. Is it possible that not one of the major economists surveyed is capable of tracking these numbers within a reasonable margin of error?
In my previous life as a convertible bond trader I was constantly dealing with the vagaries of the repo market. Unlike in equities the individual bond issues by corporates can be comparatively small, thus making it difficult to short specific issues. At one stage it was common to have considerable amounts of failing trades against which you'd put up collateral such as US treasuries or JGBs. During the 97 Asia crisis the confusion relating to these trades was quite extraordinary. Often particular institutions or funds were unwilling or unable to deal with failed bond trades and would buy you in, causing very nasty short squeezes. Funnily enough you can imagine the situation where a AAA credit bank fails on a trade of say a junk rated bond (e.g. Hyundai Telephone), but the institution on the other side doesn't care because implicitly the likelihood of you being able to make good on coupons on principal of the bond in question was greater than the issuer of the bond itself. The problem of course was when the chain of buyers and sellers was corrupted by a comparatively "junky" trading house that no one wanted to have open obligations with. This is the risk of having masses of failing bond trades and if you think about where we are now you'll understand that banks that used to be AAAA are not so anymore. That's why the Fed, the BoE and the ECB are becoming more interested in the fail rate in the government bond markets. The FT reports that number of failed trades in a key short-term financing market has jumped since central banks indicated they might wind down monetary easing policies. Fails on repo trades that involve US Treasuries as collateral jumped from $14.5bn to $58.5bn in the week to May 29, according to Fed data, and that number is believed to have increased since. The central banks are wondering what happens if someone gets bought-in . . . can they settle. It may be that a short squeeze could be followed by a collapse of an institution unable to meet its' obligations. Systemic risk is therefore still a worry and investors need to pay attention.
While the regulators are investigating the bond market's failed trades they (specifically the UK FSA) is also probing the FX markets. I'm less concerned about this, though like Libor there has always been the potential to manipulator the various fixes. The difference between Libor and FX has always been the thought that the FX market is by comparison almost infinitely liquid. I think this one is all about protecting investors and to a lesser degree having a better idea of the various cash-flows in the market. Lets just say this one is for trading "wonks" like me.
I finally managed to struggle out into the blue of a Sydney day on my bike. The winter so far has been very mild so it was shorts and arm warmers today. I'm still getting adjusted to winter riding here as my clothing is either too heavy or too light. I've found that the best jersey I own for Sydney is the Rapha Classic.
|In Australia you have to wear a hemet. Hipsters not welcome!|